Greener Pastures

By

Vito J. Racanelli

Updated Nov. 1, 2004 12:01 a.m. ET

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THE PHRASE "GLOBAL HOT SPOTS" probably conjures up thoughts of war, terrorist threats and the ethnic strife afflicting the world today. But it also describes a plethora of bourses around the world that so far this year have outperformed -- some by a wide margin -- the U.S. markets.

In 2003 just about every stock market went up sharply. But this year it has paid to be invested in the right countries. Money bet on the home team has produced lackluster returns. Year to date, the Standard & Poor's 500 index is up about 1%. Meanwhile, some of the markets described below have soared, and investors who ventured overseas have likely done better than the stay-at-home folks.

Several factors have driven the outperformance of markets as geographically diverse as Mexico, Peru, Norway, Hungary, Egypt, Saudi Arabia, Indonesia and Australia. First, rising oil and commodity prices are helping countries sitting on highly valued resources. In other cases, "it's yield hunger," says Ajay Kapur, Citigroup's global strategist. With the U.S. market acting poorly and bond yields low, investors have scoured the world for better returns, looking at once-neglected, if riskier, markets. This often means emerging markets, where economic growth is typically stronger than in the U.S. A number of these far-flung places have seen a bit more political stability this year. Here's a rundown:

THE AMERICAS: The 75% total return in Colombia so far in 2004 (all returns are in U.S. dollars) is partly an oil play, but corporate profits are benefiting from strong economic growth of more than 3%, likely to continue into 2005. Additionally, the 2005 price-to-earnings ratio of the market is seven times, compared to an average of 11 for emerging markets, says Leila Heckman, a principal at Heckman Global Advisors. Peru, up 52%, is benefiting from the rise in copper prices.

In the much larger Mexican Bolsa, up 27%, investors have liked the benefits that companies south of the border get from the U.S economy. Mexico, too, is partly an oil play, adds Heckman, but mostly the rise comes on expected better economic growth and earnings growth. She likes Latin American markets generally for next year because of the prospects for continued good earnings.

Mexico has a number of companies with American depositary receipts that trade in the U.S., as well as country and index funds. With a few ADRs and even fewer country funds, exposure to Columbia and Peru is perhaps best done through a Latin American regional fund. Readers can check JPMorgan Chase's www.adr.com for more information on ADRs or www.morningstar.com for funds data. In many cases mutual funds and exchange-traded funds are the easiest ways to invest overseas.

EUROPE: The 35% rise seen in Norway comes on the oil spike, says Hayes Miller, a global equity fund manager with Baring Asset Management. Miller, who is overweight Norway, thinks valuations are still relatively cheap and likes the banks and financial services companies there for next year, rather than the oil companies.

Austria's 40% rise comes from its strong exposure to fast growing new members of the European Union, like the Czech Republic, among others. And the latter, too, had a banner year, up 49%. Miller says he's taken some profits in Austria, which might be "fully valued" on a short-term horizon, but the economic improvement expected in eastern Europe will continue in the long term, he adds.

Many of the larger Norwegian, Austrian and Czech companies have ADRs that trade in the U.S, and there is an Austria ETF. Single-country funds on all three exist, though many of these may be available only in Europe, and there are many Eastern European regional funds.

MIDDLE EAST/AFRICA: Egypt, up a whopping 81%, isn't a direct oil play but benefits from strong growth, privatizations, and money flowing in from the nearby oil producers like Saudi Arabia, which is up 62%, and Qatar, up 41%, says Citigroup's Kapur. There are a handful of Egypt country funds.

With tiny markets, the Middle East is a difficult place for outsiders to invest. Still, one might get some exposure here through luxury goods and financial services, Kapur says. That's because a good chunk of oil money flowing into the region is sure to get stowed away in European private bank accounts or spent on glitzy goodies. Swiss bank
UBS,
as well as stocks like
Burberry,
Bulgariand Coach quickly come to mind. (See "Rich Opportunity")

ASIA: The lucky country, Australia, is up 17%. It is, of course, a mining play, but it has also shown strong growth and offers a 4% stock-dividend yield. There are concerns about a housing-market drop and P/Es are high, but Baring's Miller still likes mining giant
BHP Billiton.
Fears of a China slowdown will create volatility, but "it's hard to see a big drop" in the gross demand for commodities, he avers.

Indonesian stocks, up 17%, began to rise after the recent election of the country's first directly elected president, which has brought political stability. Indonesia is also a resource play and an emerging market of over 200 million people. Heckman likes both Indonesia and the Philippines, up 22%, for growth potential.

Diversification is a useful investment tool, but many of these markets are risky places. Yes, there have been some fundamental improvements, but to get higher returns again in 2005, you generally have to be willing to forecast higher oil prices and lower interest rates, says Citigroup's Kapur, adding "that's something I'm not prepared to do."

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